Posts Tagged ‘iPad sapphire’

By Matt Margolis

sapphire screen

Apple and GT Advanced Technologies signed their statement of work (SOW) on October 31st ,2013.   The agreement between the two companies does not identify what “sapphire materials” GT will be providing Apple, but I can assure you that the answer is sapphire cover screens.  The only question that remains open is how fast will Apple adopt sapphire cover screens across their portfolio of iDevices.  Apple has purchased, updated and retrofitted a 1.3 million square foot facility in Mesa, AZ for GT to occupy and grow sapphire boules.   Based on a recent report by UBS, GT is growing sapphire boules, coring the boules into a predefined ‘form factor” and shipping the sapphire cores to China to be processed into sapphire cover screens.

During the Q2 2012 conference call (see comments below) on August 2nd 2012,  GT  indicated that they were actively working with several customers and major end market players to qualify and certify sapphire produced from their ASF systems for use of sapphire in handheld mobile devices.  Just 3 weeks later GT signed a confidentially agreement and 14 months later the two companies agreed to a SOW for to produce sapphire materials in Mesa, AZ.  I expect Apple to introduce the iPhone 6 covered in sapphire between June and September, which approximately 2 to 2.5 years after GT indicated their sapphire for mobile devices was being qualified and certified.

One of the most promising opportunities in the consumer market is the broader adoption of Sapphire and handheld mobile devices. GT’s ASF grown Sapphire is particularly well suited for these applications, and we’re actively working with several of our customers and major end market players that have approached us to qualify and certify sapphire produced on our ASF systems as a more cost-effective, scratch-resistant and optically superior alternative to other materials currently in use.

We believe that GT is the only sapphire equipment company capable of quickly scaling to support the quick ramp of quality, cost and sizable volumes that the mobile device market could require as sapphire gains wider market adoption. (GTAT Q2 2012 Prepared Remarks)

I wanted to spend some time focusing on Apple and GTAT relationship in the past just to show how long it took to go from sample testing to market introduction for sapphire cover screens on a mobile device.  The infrastructure and equipment ramp up would have been much less if GT did not engage with Apple but in genera it takes a good 18 to 24 months to go from sampling product to market introduction on a mobile device.

Rubicon’s Acknowledgement that GT will be providing Sapphire Cover Screens to Apple

Rubicon is equipment maker and sapphire producer. Unlike GT, they do not sell their equipment and they are truly a one trick pony.  Rubicon is primarily a sapphire producer for the LED market but as indicated by its management they are growing selling small sapphire cores to its polishing partners.  Rubicon’s smaller diameter cores of sapphire that are being sold for mobile devices are related to  the production of sapphire lens covers, which have been adopted by several phone manufacturers since Apple led the way in 2012.

Rubicon made some very telling comments regarding the sapphire use in mobile devices, specifically the use of sapphire for cover screens during their Q1 2014 conference call (Courtesy of Seeking Alpha).

The use of sapphire in mobile devices is a relatively new application and has a normal potential for growth. Smartphone manufacturers are looking to incorporate sapphire on the exterior of their devices due to the strength and optical characteristics it provides.

Thus far, most of the demand for these applications had come from one manufacturer. However, we believe we will begin to see greater adoption of sapphire in mobile devices. We participate in this market, primarily by selling a significant amount of smaller diameter core to our polishing partners. We are also well positioned to sell larger diameter bulk crystal in a variety of shades and dimension into the market as additional applications develop.

We also believe that we are in the very early days of the use of sapphire in the exterior mobile devices for applications like camera lens covers and home buttons. Based on our knowledge of the marketplace with the exception of one competitor who is building out capacity for a specific customer, none of the existing sapphire producers are planning to add capacity in the current environment and some competition is now leaving the market.

First of all, I think it’s very interesting that Rubicon even tried to cryptically cover up (no pun intended) the sapphire cover screen build out, “one competitor,” who is building out capacity for a “specific customer”.  The translation is GTAT is building out capacity in Mesa, AZ to cover Apple’s devices with sapphire screens.  The other very interesting point is that, “none of the existing sapphire producers are planning to add capacity in the current environment and some competition is now leaving the market”.  This is the clearest indication yet that GT’s build out in Mesa is on track and there has not and will not be a “Mayday Mayday Mayday” call to another sapphire producer to step in and help GT will Apple’s needs anytime soon.   Spare sapphire industry capacity outside of Mesa, AZ is absorbing mobile sapphire growth as well as players leaving the competition all together.

Conclusion

At this point GTAT is on target to supply sapphire screens for Apple devices by the middle of 2014, starting with the iPhone 6 and iWatch and followed later by the refreshed iPod.  It is still too early for me to assess the likelihood that GTAT will supply sapphire cover screens for the iPad, iPad mini and the rumored 12.9″ over sized iPad.  I can tell you Apple’s plans for sapphire do not begin and end with the iPhone and the iWatch but they will extend in some fashion across all of Apple devices, current and future.  Furthermore, it is also clear to me that even Rubicon knows that GT will be supplying sapphire screens to Apple.  Additionally, Rubicon indicated that, “none of the existing sapphire producers are planning to add capacity,” which is a clear indication that Apple and GT have built a moat around sapphire cover screens for at least the next few years.

moat

 

Sapphire Cover Screens: As Apple and GTAT lead the charge others will follow! 

Apple led the way in 2012 with sapphire camera lens covers and the rest followed.  Apple led the way with a sapphire home button in 2013 for biometric scanning and the rest are slowly following.  Apple will lead the way with sapphire cover screens in 2014 and the rest follow, but it might will them a few years or even longer.

If you don’t believe the Obscure Analyst just take a look at what Rubicon said 3 months ago during their Q4 2013 conference call and last week during their Q1 2014 conference call.

 

Rubicon Q4 2013 Conference Call

Apple was the first company to adopt a sapphire camera lens cover and now other smartphone manufacturers are also including sapphire lens covers for their newer models. Apple’s latest iPhone model, the 5S incorporated a sapphire home button.

The switch to sapphire for their home button in the 5S was because sapphire is virtually scratch proof and offers improved touch capacitance, which are important characteristics to ensure the effectiveness of the fingerprint recognition security they have built into the phone. It is our expectation that other mobile device manufacturers will also add similar functionality soon.

Rubicon Q1 2014 Conference Call

The use of sapphire in mobile devices is a relatively new application and has a normal potential for growth. Smartphone manufacturers are looking to incorporate sapphire on the exterior of their devices due to the strength and optical characteristics it provides.

 

Full Disclosure: I am long GTAT and I can’t wait to pre-order my sapphire covered iPhone 6

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by Matt Margolis

The notion that GTAT is the only company that can deliver Apple’s sapphire goods may have come up on my own but the idea was driven home during TG’s onset interview with CNBC’s fast money on March 17th.   During TG’s three minutes on Fast Money he defended he focused on creation of jobs, the unique nature of the Apple project and defended the margin on Apple.

Commitment for jobs back in the US, it is a sapphire manufacturing facility thats all we’ve said and Apple has said, it is a rather sizable operation with 1.4m square feet under roof.  What we reported on our last call is that we are going to probably going to hit 1,000 employees mid year as a company and things are going well.  As you can imagine in that industry surprise is an important element of introducing new products.  We are spending a lot of time ramping the facility up.  This will be a lower margin but I think the unique nature of what we are doing for Apple and we are probably the only ones in the world who can pull this off put us into a good position.  We are not going to be selling commodities here we are selling and making good margins but the fact of the matter is the margins are below the margins we would get for our equipment.   This is not just Apple we introduced products that should drive 3 to $5b of incremental market opportunity over the next 3 to 5 years that all are all equipment products in sectors we have entered over the last 3 or 4 years.

My 4 Why’s

Why does TG feel that GT is the only ones in the world who can pull this off?  Apple already had an existing arrangement with Asian sapphire manufacturers to supply key sapphire components for the iPhone camera lenses and the home button covers.  Why wouldn’t Apple just stick with those suppliers and have them grow more sapphire?  Why would Apple pour $2B into a sapphire manufacturing facility with a company that has never produced sapphire  to this scale?  Why are the analysts minimizing the potential size of GT’s recurring revenue stream from Apple?

Goldman Sachs is Heavily Discounting the GT’s Revenue and 2016 EPS Estimates

Goldman Sachs is estimated Apple’s sapphire business at $500m 14′, $958m 15′ and 1,039m in 16′ with approximately $1 EPS  of their $1.94 2016 estimate coming just from Apple.   Does it make any sense why Goldman Sachs values GT at only 12x 2016 earnings when more than half of the EPS estimate  is recurring in nature?  I think the bottom line is outside of TG and TC and some raving fans I don’t believe anyone in wall street believes GT can pull this cover story off.    The wall street analysts have baked in some considerable risk into their price targets because they believe GT’s lack of high volume material business experience is a significant risk to executing the project.

I don’t know exactly what Apple will cover in sapphire but I do expect them to surprise just about everyone to the upside.  I’m currently estimated Apple revenue at $1,180m 14′, $2,027m 15′ and $2,216m in 16′.  My estimated revenue includes revenue for the iPhone, iPod and the iWatch and it assumes a September 2014 launch for all 3  products.  If Apple added the iPad to the mix it would add an additional $1,400m a year in revenue by 2016.    If you add up my base estimate and as well as the iPad revenue I am modeling out GT’s revenue potential with Apple at just under $4B in annual revenue by 2016 with a future growth rate of 10% annually.  It should come as no surprise that my Apple base revenue estimate is double Goldman’s estimate. Goldman’s model does not even assume any new products get introduced with sapphire by 2016.  Their 10% growth estimate just assumes an industry unit growth estimate.  Are they naive enough to assume that this project will be mature in 2014 and will just make iPhones and that GT’s sales will nearly double in 2015 from 2014 estimates and then grow at a 10% rate annually?  Give me a break!

Goldman Sachs seems to be doing everything in their power to keep their price target low.  They are currently modeling Hyperion at $57m in revenue for 2016 along with a contribution of negative $0.03 EPS.  However, by 2018 Goldman expects Hyperion to contribute $1.58 in EPS assuming the middle of the road 60% of TAM and a gross margin of 35%.  For clarity this Goldman is assuming GT’s Hyperion sales will jump from $57m in 2016 to $2.25B in 2018.  GT’s management is expecting to receive initial orders in 2014 for delivery in 2015 that will exceed Goldman’s 2016 Hyperion estimate of $57m which is roughly 6 Hyperion tool sales.  Goldman flat-out does not want to give any credit to GT’s Hyperion opportunity and the way they modeled out 2016 they don’t even need to deal with it.  My point here is Wall Street analyst’s are not giving GT Advanced market potential market opportunity with Apple or even Hyperion much respect and it’s time they start thinking outside the box.

GT is One of a Kind!

TG knows that GT is the only company in the world that can pull off the Apple sapphire project.  How many sapphire production equipment makers are there in the world?  How many sapphire manufacturing operations are there in the world?  How many sapphire production equipment makers are also running sapphire manufacturing operations in the world?

There is just 1 company in the world that produces sapphire equipment and also runs a sapphire manufacturing operations in the entire world.  That one company is GT Advanced Technologies.  I’ve read a lot of material over the last few years related to sapphire and sapphire operations.  One of the biggest issues with producing sapphire materials is having the knowledge to run the equipment.  It can take months for ASF furnace customers to get their yield up to where they want it.  GT sapphire solution includes on site training to help with the knowledge transfer and to reduce the learning curve and help achieve the desired material yields.  The biggest issue is customers will not be able to produce the results that GT does in their labs.

You know what would be a brilliant idea if Apple selected the only company in the world that actually designs and makes the ASF furnaces and actually uses them to produce materials and has years worth of man hours under their belts testing, innovating and upgrading their ASF furnaces on an ongoing basis.  Apple gets GT’s know-how related to the ins and outs of the furnaces as well as the experience of using their best and brightest to run the sapphire operations in Mesa, AZ.  There is no other company in the world that can offer the intimate knowledge of the equipment as well as years of experience in actually growing and performing R&D on sapphire products in their lab.

Paul Beailieu GT’s Vice President of sapphire operations in 2011 summed up what gives another advantage unique to GT, GT is “the only merchant equipment provider that also operates a modern, state-of-the-art sapphire production facility.  This quote was taken from Yole Developpment’s March 2012 LED Industry Review.

Screenshot - 4_6_2014 , 9_33_53 PM

If you are wondering how GT got its name  GT Advanced Technologies the answer can be found below.  It seems clear that GT is in a league of their own with sapphire furnaces as well as developing their other equipment that they acquire (i.e. Hyperion).  The quote and image below was also taken from Yole Developpment’s March 2012 LED Industry Review.  What is more impressive about the quote and image below is that it came from the director of a rival furnace producer named Oleksandr Lavryk from Pryroda Engineering.

Before the entrance of GT Advanced Technologies, the market for sapphire equipment was a case of a ‘Market for Lemons’ as described by Nobel prizewinner George Akerlof, Lavryk told iLEd.  Akerlof’s ‘lemons’ are used cars, where for regular buyer it is notoriously difficult to assess the quality.  Good cars and lemons are sold for the same price because buyers see no difference in them.

It can be argued that one of GT’s core skills is to identity quality and potential of equipment.  GT acquires equipment with high potential, develops it further and resells it to those who lack the important skill of identifying equality of equipment.

 

Screenshot - 4_8_2014 , 10_05_53 PM

Conclusion

This article highlights why GT Advanced Technologies is one of a kind, Apple knows it, TG knows it and now every reader of this article knows it.  GT may not have the experience of delivering hundreds of millions of sapphire cover screens or ramping up a large-scale operation in just 6 months but they can do it.  They are the only company on the planet that produces sapphire growing equipment that also run a sapphire operations.

I played high school and college basketball and I had a fantastic basketball coach.  Our coach taught us and we ran John Wooden’s famous flex offense.  My coach had a great understanding of the offense, he had scouted teams that ran it and played against teams that ran the offense.  I have to believe my team would have been even more productive on offense if the legendary John Wooden was coaching us.  John Wooden ran the flex offense successfully at UCLA for years and even wrote a book on it.

Apple by signing up GT Advanced to buy and operate their ASF furnaces to grow sapphire materials for Apple has added a technological innovation legend to their bench.  GT’s equipment knowledge inside and coupled with their years of experience in the lab growing and researching sapphire will produce an astounding amount of sapphire in such a short period of time to cover most if not all of Apple’s devices in 2014.  It’s now clear to everyone why GT is One of a Kind and Apple knows it!

If you are interesting in following my tweets, asking me a question or just want to give feedback or say hello you can follow me @sapphirecover24 on Twitter.

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings over the next 72 hours

 

by Matt Margolis

My unique research style includes sifting through various public information including articles, social media and the latest from the street.  I stumbled upon a very interesting article last night by accident while I was laser focused on finding something else.  I actually attempted to duplicate my search and find it a second time but was unsuccessful,  thank goodness for web browsing history.

Canaccord Genuity Conference August 17, 2012

The article dates back to August 18, 2012, which happens to be the next day following the Canaccord Genuity conference that was hosted on Friday August 17, 2012.  For the long-term shareholders they will remember this conference and the infamous upgrade from Canaccord Genuity’s analyst Jonathan Dorsheimer, who cited GT management’s body language regarding sapphire smartphone cover glass.  Jonathan’s note regarding the upgrade as reported by the Street.com is below:

“We are upgrading GTAT shares on increased buzz around potential smartphone applications…We believe that the smart phone cover “glass” opportunity for sapphire is becoming closer to reality based on our work in the supply chain and GT management’s body language.”

As it turned out, Jonathan was wrong on timing and the sapphire smartphone cover glass opportunity was not as close as he first thought.  But my biggest question is what did the Canaccord analyst notice from GT management’s body language.  I am the first to admit that there is tremendous value gained by observation and sometimes a person’s body language tells more of the story than the actual words spoken.

The August 18, 2012 Article

The August 18, 2012 article that might hold the key detail behind the Apple contract was published by Gulfnews.com.     The article is short and sweet and it covers the Canaccord Genuity conference.  The Canaccord Genuity conference was not focused on sapphire but focused on GT’s investment into continued growth and diversification (Sounds a lot like their Technology Conference in March!). The specific quote from the Gulfnews.com article is below,

Sapphires may replace glass on mobile phones and tablets, chief executive officer Thomas Gutierrez said at a Canaccord Genuity conference on Friday. GT Advanced, which makes tools to grow sapphires, has sought non-solar applications for its technology as a global glut of panels reduced demand for systems that make polysilicon and photovoltaic wafers, Gutierrez said in May.

GT’s CEO Tom Gutizerrez indicated on August 17, 2012 that sapphire may replace glass on not only mobile phones but also tablets.  I know what you are thinking right now.   Why would this have anything to do with Apple?  GT’s CEO made a generic statement why would this hold the key to the Apple deal?

The Power of the Mind and the Body

I think it’s very important to understand the context behind TG’s comment made on August 17, 2012 during the Canaccord Genuity Conference.  Why would TG say, “Sapphires may replace glass on mobile phones and tablets.”  Why would Canaccord’s analyst upgrade shares of GTAT based on “GT management’s body language” surrounding the sapphire cover glass opportunity?

In order to fully understand Canaccord’s comment and put some context behind TG’s comment I needed to find something that would explain what could possibly be going on with GTAT at the time of this conference.  TG has always been confident so he must have had his normal swagger and then some during this conference back in August 2012.  I believe the answer to this riddle, of the mind and the body was hidden in plain view, within a key document that would be released to the public 15 months later.    On November 4, 2013 GT Advanced Technologies and Apple announced a sapphire deal but the answer to this riddle lies within the Master Development and SOW agreement, which was signed on October 31, 2013.   As you can see from the image below, GT Advanced Technologies and Apple signed their confidentiality agreement on August 24, 2012.

The plot is now beginning to thicken as the dots get connected.  If we put ourselves back in time knowing that GT was in the midst of signing the confidentiality agreement with Apple for sapphire cover screens it would make a lot more sense why GT’s management could not withhold their excitement.  The sapphire cover screen was one of the primary focuses for GT’s management and they were going to be handed the key to Apple’s device empire.  Based on additional information provided from the Q3 2012 Conference Call GT hah been working closely with Apple for several months on sapphire cover screens.  According to GTAT, we have already gone beyond, “the NDA stage, we’ve delivered furnaces. We’ve delivered material now. We’ve delivered sample screens, actually, in some cases. And so it’s gone well beyond”.

Screenshot - 4_7_2014 , 8_31_22 PM

Q3 2012 Conference Call Transcipt

The last major spoke that spins this wheel can be found inside the Q3 2012 conference call transcript.  The conference call was held on November 7, 2012 just 11.5 weeks after GT signed the confidentiality agreement with Apple.  The biggest question is how will GT’s management handle the recent development with Apple and what will they say about the sapphire cover screen opportunity?  I have read this transcript numerous times but putting the Canaccord Genuity Conference body language, the comments made during the Canaccord Conference and the fact that GT and Apple signed the confidentiality agreement in August  just  a week after the conference might give you the chills.  The bullet points below came from GTAT’s Q3 2012 conference call transcript and can be read for free in its entirety at Seeking Alpha.

  • #1 High-volume, scalable, low-cost sapphire production is now possible with the commercial availability of our technology, and breakthrough fabrication technologies have and will continue to drive out significant costs.
  • #2 While we’re not able to reveal all of the details behind our published range due to customer and partner sensitivity, here are some important points to consider.
  • #3 This does not reflect the other significant cost reductions that we believe can be achieved as we further optimize the ASF growth process for this application through adjustments, such as optimized boule size, shorter cycle times and lower cost consumables.
  • #4 There are some really innovative technologies that are being developed by ourselves and our fabrication partners that would bring the back end down very substantially in the fabrication area.
  • #5 As a result of these factors and several other proprietary data points that we’re not able to share, we are confident that the cost targets are achievable and acceptable.
  • #6 And unfortunately, with the big smartphone players, you won’t know until it happens.
  • #7 And that’s what they’re all about, it is out-surprising each other.
  • #8 We’ll start laying down assets second half of next year, but you won’t see a high-volume phone with sapphire on it, I don’t think, until 2014
  • #9 I think the other thing that’s gone beyond the NDA stage, we’ve delivered furnaces. We’ve delivered material now. We’ve delivered sample screens, actually, in some cases. And so it’s gone well beyond, “Let’s sit in a room with an NDA and talk about it.”
  • #10 There’s been a lot of discussion regarding the cost of sapphire for cover screens and question as to whether the cost range that we recently published of $10 to $20 above current glass solutions is achievable.
  • #11 But we’re confident, okay, that we can be inside that box. And we’re also confident that, that’s just the initial box, okay.

I want to address some of the bullet points and provide even more evidence that sapphire screens are coming to the iPhone and iPad and likely across everything else Apple makes.

 

Bullet #1  GT cites that, “High-volume, scalable, low-cost sapphire (screen) production is now possible with the commercial availability of our technology“.  This comment is nearly identical to the press release (see below) from GT Advanced announcing the Apple contract.  The language might be ambiguous but the statement is nearly identical to the Q3 2012 discussions related to sapphire cover screens.

GT has accelerated the development of its next generation, large capacity ASF furnaces to deliver low cost, high volume manufacturing of sapphire material.

Bullet #4 Innovative Fabrication Techniques – On September 20, 2012 Apple filed for their “Multi-Step Cutting Process” patent.  The patent covers Apple’s laser cutting techniques, which is an extremely innovative fabrication technique and was filed between the signed confidentiality agreement and GT’s Q3 2012 conference call.

Bullet #6 Big Smartphone Players – You never know when it happens and they like to suprise each other.  This sounds very similar to the comments TG made during his appearance on Fast Money on CNBC when asked by the host of the show when sapphire would start showing up.  Interesting!

Bullet #8 GT will start laying down assets the second half of year – GT announced during its Q4 2013 results that they deployed $180m of Capital Primarily in Arizona, which was consistent with plans GT announced nearly a year prior to lay down assets for sapphire cover screens production.

Bullet #8 You won’t see a high-volume phone with sapphire on it until 2014 –  The only known customer besides Apple that GT had lined up for sapphire screens was Canonical (Ubuntu Edge) and Apple is the only one of the two companies who would sell high volume phones with sapphire.

Conclusion:

Did GT’s management give away proof through their super confident body language that they were just a few days away from signing a confidentiality agreement, that they knew would lead to a multi billion dollar annual contract with Apple by the end of 2013?

Did TG spill the beans and clearly indicate that GT would be making sapphire cover screens for Apple phones and tablets during the August 17, 2012 Canaccord Genuity Conference?

Did GT’s management change their tune dramatically during the Q3 2012 conference call and shift significant focus on their recent sapphire developments specifically the signed Apple confidentiality agreement and how it would impact their operations in 2013?

Did GT’s management spend nearly half of their Q3 2012 conference call discussing; sapphire cover screens, sapphire NDA’s, cost of sapphire screens, laying down assets a year in advance and  introducing the expected timing of the first high volume sapphire screen?

 

My answer to all of these questions is YES! YES! YES! YES!   How about you?  But hey what do I know, I’m just the Obscure Analyst.

 

If you are interesting in following my tweets, asking me a question or just want to give feedback or say hello you can follow me @sapphirecover24 on Twitter.

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings over the next 72 hours